Antitrust Law Daily Wrap Up, STRATEGIC PERSPECTIVE: Settlement of US Airways-AMR merger challenge draws strong reactions from all sides, (Nov 15, 2013)
Organizations Mentioned:American Antitrust Institute | Amr Corp. | Cleveland State University | U.S. Attorney General | U.S. House of Representatives | US Airways Group, Inc. | University of Iowa
By John W. Arden, J.D., LL.M.
This week’s filing of a proposed settlement of the government challenge to the $11 billion acquisition of AMR Corp. by US Airways Group, Inc. has prompted some strong reaction among antitrust experts, as well as the general press, much of it aimed squarely at U.S. Attorney General Eric Holder.
The Attorney General is getting it from both sides—from those criticizing the Department of Justice and six states for settling too easily and from those maintaining that the challenge should never have been brought at all.
The Department of Justice and the attorneys general of six states and the District of Columbia reached a proposed settlement that would permit the merger of US Airways Group and AMR, the parent corporation of American Airlines, in exchange for the airlines’ agreement to divest slots and gateways at key airports and certain other concessions. The merger would combine two of the four major “legacy” air carriers and provide American with a path out of bankruptcy.
Under the terms of the proposed final judgment, the airlines must divest slots and gates at Boston Logan International Airport, Chicago O’Hare International Airport, Dallas Love Field, Los Angeles International Airport, Miami International Airport, New York LaGuardia International Airport, and Ronald Reagan Washington National Airport.
The Justice Department intends these divestitures to provide greater opportunity for low-cost carriers to compete with the combined entity and the other two remaining legacy carriers, Delta Airlines and United Airlines; to permit entry or expansion of airlines at key airports; and to eliminate a substantial increase in slot concentration at Reagan National.
AAI critique. The American Antitrust Institute (AAI) criticized the government’s acceptance of settlement terms that reduce the number of hub-and-spoke based national systems from four to three, while creating the world’s largest airline.
“After issuing a tough Complaint that described in detail how the proposed merger would likely reduce competition and harm air travelers, the government—on the brink of trial—backed away from many claims, while at the same time obtaining structural remedies whose benefits will only be known in the future,” the organization said in a November 12 announcement.
While the government’s complaint charged that the proposed merger would be presumptively illegal in more than 1,000 route-based markets, the remedy “simply ignores the vast majority of these routes, and the loss of US Airways’ discounted fares for one-stop routes that helped maintain competition,” the AAI claimed. “Under the settlement, smaller cities and towns and travelers who currently have the opportunity to use lower-priced, indirect routes may no longer have this well named Advantage Fare, although new competition from low-cost carriers might filter into an unpredictable number of these routes.”
In conclusion, the AAI asserts that the Justice Department’s “strong Complaint” might have blocked the merger. Instead, “it has traded off one independent hub-and-spoke carrier for the possibility that two point-to-point carriers will be enabled to grow into the equivalent of a replacement competitor.” That is a risky bet in an industry where the skies “have become too friendly,” according to the organization. “We would have preferred to see the case go to trial on its merits.”
General press reaction. Rather than criticizing the settlement, the general press has questioned the wisdom of the merger challenge—or at least the overselling of the challenge in the complaint and other Justice Department pronouncements.
In a Wednesday editorial (“Holder’s Antitrust Bust”), The Wall Street Journal characterized modern antitrust enforcement as “an exercise in arbitrary politics” and called the settlement a “humiliating retreat.” After stating concerns about the merger resulting in the end of low-priced Advantage fares and spiking ancillary fees, the Antitrust Division agreed to a deal that does nothing about Advantage fares and ancillary fees, and does not change the rules for thousands of routes. The editorial dismissed the required divestitures at Reagan National Airport as confirming that “all politics is local” and “an example of D.C. travelers taking care of themselves on the way out of an unwinnable case.”
While understanding why the airlines agreed to the settlement, the Journal maintained that the airlines “could have done a public service by forcing Justice to prove a case it never should have brought.”
The Dallas Morning News did not have such profound doubts about the challenge, but reflected on whether the conflict matched the hype. Editorial writer Jim Mitchell observed that the benefits of the settlement “don’t match the DOJ’s bombast or its legal theory in opposition to the merger …” This episode leaves the Justice Department having to explain what the aggressive lawyering was all about. “Did Attorney General Eric Holder or [Antitrust Division chief] Baer really have to haul out the nuclear weapons to win divestitures that ultimately were achieved in normal negotiations?”
Antitrust expert opinions. University of Iowa law professor Herbert Hovenkamp took more of a middle ground, saying he was “pretty optimistic” about the results of the case.
“This settlement is very much a compromise,” said Hovenkamp, co-author (with Philip E. Areeda) of the landmark antitrust treatise Antitrust Law: An Analysis of Antitrust Principles and Their Application (Aspen Publishers).
“This case was not open and shut in the first place,” he noted. “The government might have won, blocking the merger altogether, but might have lost as well.”
In the airline industry, there are two sets of concerns: hub concentration and route concentration, according to Hovenkamp. The settlement addressed the former, focusing the remedies where the major concerns were. “This merger would in fact injure competition at two major airports—LaGuardia and Reagan—and that is where the remedies went to.”
A feature of the settlement not receiving enough attention is the opening of the door for low cost carriers Jet Blue and Southwest, in Hovenkamp’s view. “They are regarded as mavericks. You want to preserve mavericks because they compete on price and ancillary factors, such as baggage fees and other charges.”
Currently the two carriers have small networks and fly out of secondary and tertiary airports. This settlement provides them with access to two high-volume airports, he pointed out.
Christopher L. Sagers, James A. Thomas Distinguished Professor of Law at Cleveland State University, was less positive about the outcome of the challenge.
Sagers had testified against the merger during a February 26 hearing of the Regulatory Reform, Commercial and Antitrust Law Subcommittee of the U.S. House of Representatives’ Judiciary Committee, stating that past airline mergers had not led to the efficiency-related price decreases and improved airline performance promised prior to the mergers. He contended that the U.S. Airways-AMR merger would likely lead to higher fares for consumers and job losses, and that the carriers’ economic difficulties held little significance.
On Wednesday, he cautioned that the merger and settlement were “big and complex,” and that judgments about their effects are difficult to make without detailed study and the passage of time. Nevertheless, Sagers views the settlement as a “significant missed opportunity that is likely to result in a lot of consumer harm that could have been avoided.”
While the settlement secures a large number of individual slot divestitures, the strong evidence from prior airline mergers is that divestitures are not effective. “We’ve had about 40 years since deregulation to see whether small scale entry can really discipline carriers that have substantial market share on a given route, and the answer has been emphatically that it can’t. Only Southwest has ever been able to have a measurable impact on pricing on concentrated routes, and Southwest can no longer be counted on as the pricing maverick it once was. Southwest is itself now a very large carrier, and it no longer makes sense for it to behave as other than one of the members of a small-number oligopoly.”
Sagers said that the challenge to this merger was “exhilarating and surprising to the entire antitrust community” because the government seemed to say that an injunction against the merger was the only acceptable remedy and that the divestitures required in the past had not slowed concentration or kept down prices. In this context, the settlement was disappointing, he observed.
He also expressed concern about the perception of the case in the business community. ”I think they will believe that the Justice Department, which had a very strong case on liability and initially stated that it could settle for no result short of blocking the merger, can be pressured through lobbying,” Sagers observed. He referred to the pressure applied by the merging parties, unions, and members of Congress.
“I don’t know if that pressure was actually effective or not—for all I know, it had no effect on DOJ at all and DOJ vehemently denies that it did—but the business community seems to think that it did work,” he noted.
“So I’m afraid the message to them will be to go ahead and do mergers no matter how big and anticompetitive they might be, because you don’t have to win in court any more, you win in the court of public opinion.”
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